This past autumn, a long-time reader and portfolio management client asked a question that other investors may wonder about in today’s turbulent markets. He wrote,

“You constantly remind members to have a balanced portfolio and strategy for long-term success when investing. But when do you take profits? You have mentioned a couple of times to sell, such as when a stock makes up too much of your total portfolio, or if a company shows questionable management or business decisions. My main question is why don’t we sell when stocks move up and there are profits to be had?”

I often asked myself that question in my first decade or two in the investment business. In hindsight, it always seems easy to spot market tops and market bottoms. But trying to spot those tops and bottoms as they occur is harder. I investigated all sorts of market theories and signals that purport to tell you how to do it. They all seem to have “worked,” at least some of the time. But none worked consistently.

The problem is that market tops and market bottoms can take place in response to anything that is going on in the market, the economy and the world. But buy and sell signals focus on a tiny smidgen of that vast amount of data. A market signal “works” as an investing strategy when the market is responding to the same slice of data that the signal focuses on. It quits working as soon as the market’s focus moves on to something else.

Investors who succeed over decades—the Warren Buffett’s of the investment world—rarely, if ever, talk about spotting market tops and bottoms. They are far more likely to talk about successful investments than successful market predictions. Most have come to see, often after a period of costly stock-trading errors, that you make most of your stock-market profits through stock selection rather than stock market predictions.

I always have an opinion of some sort about the market’s outlook, and I’m happy to share that opinion with our readers. When I first replied to our client’s question last fall I said, “I see further weakness in the next month or two.” And the market did indeed take several steep declines. “After that,” I added, “I expect a year or more of rising stock prices.”

Why not sell, if the market appears to be headed down as it was then—and then buy back in a month or two when the market is lower?

Investing strategy: Some stocks will rise even when the market falls

There are several reasons not to sell. For one, the market may not go down. For another, when the market is headed for a rise, the best performers in that rise will often begin rising much earlier, and much quicker, than the market averages. One example is Apple Inc., (symbol AAPL on Nasdaq; www.apple.com).

Apple peaked around $200 a share in late 2007. It got down to around $80 in December 2008. It never did go much lower, even though the stock-market averages kept on dropping for four months. By the time the market as a whole hit its low in March 2009, Apple stock had already risen by 30% or more.

By the end of 2009, Apple had gone on to an all-time high. Since then, the stock has more than doubled. Of course, stock performers like Apple are rare. But the pattern is well established.

Stocks that are going to be top performers in the next market rise often start rising early, long before the average stock. We focus on these stocks in our recommendations.

A portfolio of homeruns is a very unrealistic idea. Taking profits is part of investing, almost as important as good stock picking. There are always other good opportunities to move on to. Sitting and holding as stocks go up and down, like CAE and CGI and Westjet and many others recommended as Best Buys is ludicrous in my view. It is not a matter of picking a market top; it is a matter of taking a sensible profit and moving on to the next good idea. You have the good stock picking covered but the sensible profit taking is next to non-existent.

Specifically he says “The best retirement plan you can have is to start saving as early in your working career as possible. You then invest a steady or rising amount of that money in the stock market every year. When you follow this plan, you automatically profit from dollar-cost averaging. You will automatically buy more shares when prices are low, and fewer shares when prices are high.

In retirement, you reverse the process. You live off your dividends, and sell stocks only when you need more money. When you do that, you sell your lower-quality holdings first. That way, your sales have the added advantage of upgrading the quality of your portfolio.”

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Opinions and information presented are not guaranteed. Some recommendations are bound to prove disappointing, so it’s essential to balance your holdings across the five main sectors of the economy, and to invest with the long term in mind. For overall portfolio direction, consult a personal financial advisor. Past returns do not guarantee future results.